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Tuesday, 22 February 2011

It is a very dangerous game to try and predict what will happen next in the Middle East and North Africa at the moment, so I report this with all the usual caveats. But John Roberts, an energy security specialist at Platts, has been watching the region for a long time, and he thinks that the possible removal of Muammar Gaddafi blows apart a lot of long-held assumptions about the region.

The key assumption as far as Libya was concerned was that with high oil revenues and a small population, Gaddafi was safe. If trouble started, he could always bribe people into remaining quiet – as he appears to have done recently, reportedly increasing wages and loans on offer to Libyans.

But it seems now that people want more than just financial security and the stability that comes with high oil revenues: they want freedom. And if they want that in Libya, which has a GDP-per-capita of around $12,000, why shouldn’t they want the same in Saudi Arabia, whose income per head is only slightly higher at $14,000 a year?

Global markets paid scant attention to the Egyptian and Tunisian revolutions. Both were seen as lacking systemic economic and financial significance.

This is now changing as youth-inspired uprisings spread to other countries in North Africa and the Middle East. While related political and social issues rightly dominate the headlines, this past weekend could also prove a tipping point when it comes to the implications for the global economy; and there is little that western countries can do to offset short-term stagflationary winds.

It is understandable that Egypt and Tunisia had essentially not registered on the markets’ traditional scale of systemic influence. The two countries are not significant global economic powers; they do not owe much money to western banks and governments; and they are not large exporters of commodities.

When will the real estate market be on the up in Dubai? Will it actually be able to recuperate after so many catastrophes? These are the questions lingering in many real estate investors’ mind, especially those who are sitting with their savings stuck in some incomplete property. Many are waiting for the market to recover completely, including the developers, construction companies, laborers, investors, and real estate agents, to name just some of the stakeholders in Dubai real estate market. Nobody knows for sure (perhaps Paul the Octopus but even he has retired). So, while we cannot predict with the surety exhibited by Paul the Octopus, we can still have a look at the odds and make a calculated guess.

Looking at the circumstances, odds are that the real estate market in Dubai is going to bounce back. Exactly how long will it take for demand to get closer to the supply is anybody’s guess but apparently it’s going to take a little longer than most experts initially expected. It’s hard to expect an upturn as long as the nations do not recover completely from the financial slump and Dubai takes care of its massive debt crisis. Recovery process can only start once the deterioration has stopped, and right now the deterioration in Dubai property market has stopped. Prices are a bit stable as compared to past and one can expect further improvement in the prices. Therefore, property owners who were anticipating a sudden upturn in property values will have to wait for a while (in fact a long while if the truth be told). Residential properties observed a trivial increase in prices, but that shouldn’t be mistaken as the complete recovery of Dubai property market. Especially when we know, that many residential properties are in the offing.

In spite of all these nerve-racking developments, there are some positives as well. For example, there were more transactions in this year as compared to the last two years. While it is not a sign of complete revival, it shows that the market is still active. However, most of these transactions involved completed properties, contrasting to the early years when a large proportion of transactions were made up of off-plan properties. It shows that the demand is there, it’s just that the buyers are suspicious of incomplete properties. Therefore, it’s safe for investors to focus on places like Jumeirah Village, Dubai Marina, Business Bay, Jebel Ali or Deira.

Dubai's index slumped to a six-month low and Qatar's benchmark .QSI saw its largest drop in nine months on Tuesday as regional turmoil spurred further selling and rendered technical support levels obsolete.

Foreign investors are dumping MIddle East stocks and many local investors are trying to beat them to the punch, exacerbating declines, traders said.

"As the populace throughout the region attempts to take on ever more tyrannical regimes, we will be faced with increasingly violent protest and consequently greater uncertainty," said Julian Bruce, EFG-Hermes director of institutional equity sales. "This will manifest itself in higher oil prices and, paradoxically, weaker MENA equity markets.

Persian Gulf shares declined, sending Qatar’s benchmark index to the lowest in three months, on concern worsening violence in Libya and instability in the Middle East and North Africa may derail a regional recovery.

Commercial Bank of Qatar, the Gulf country’s second-biggest bank by assets, retreated 1.7 percent and Qatar National Bank dropped to the lowest level in almost five months. The QE Index tumbled 2.8 percent to 8,253.16, the lowest since Dec. 2. The measure has lost 7.8 percent since Feb. 11 when Egypt’s Hosni Mubarak stepped down. The Bloomberg GCC 200 Index retreated for an eighth day, slipping 1.3 percent. Dubai’s DFM General Index declined 1.9 percent to 1,488.32, the lowest since Sept. 2.

“The situation has deteriorated and it’s inevitable that investors should be concerned,” said Paul Cooper, Dubai-based managing director at Sarasin-Alpen & Partners Ltd., which oversees more than $500 million in the Middle East. “The derisking of portfolios would suggest markets will come down.”

Bahrain and Libya’s sovereign credit ratings were cut as the two Arab countries struggle to contain anti-government protests.

Libyan leader Muammar Qaddafi said he hadn’t fled the country as diplomats resigned and soldiers deserted in protest over a crackdown on anti-government protesters that has left hundreds dead.

Abu Dhabi and Qatar led an increase in the cost of insuring government debt in North Africa and the Middle East on concern political upheaval may spread and disrupt oil supply. Oil climbed to the highest level in more than two years and bonds rose, while Asian shares and U.S. stock futures declined as violence intensified in Libya.

Aside from traffic jams, most of Bahrain has remained relatively unaffected by the political protests of the past two weeks. But the reputational, economic and financial damage resulting from the unrest could still be significant.

After losing its position as the region’s pre-eminent financial hub to Dubai over the past decade, Bahrain has attempted to market itself as a socially liberal, business-friendly and stable place for companies.

Tanks may have been withdrawn from the streets of Manama, allowing protesters to retake the Pearl roundabout, but the island’s carefully nurtured image has been badly damaged by last week’s bloodshed.

The bank, the biggest Islamic lender in the UAE by total assets, said it had replaced S&P with Fitch Ratings.

"Reflecting the bank's increased focus on the local market, DIB … has disengaged from its previous relationship with Standard & Poor's," it said in a statement. The bank could not be reached for further comment.

Cairo’s six-story Arcadia Mall, a symbol of modern commerce on the Nile River, is a charred ruin. Military officers now rule in place of Western-educated businessmen. Spending by a government that is already in debt is heading up, not down.

This is Egypt after the Feb. 11 fall of Hosni Mubarak, and if its future is uncertain, it has nonetheless drawn investor cheers as officials promise to pursue market-oriented policies. The Market Vectors Egypt Index ETF, an exchange-traded fund that holds Egyptian shares, has risen 11.5 percent since Jan. 27, when the Egyptian Exchange was shut down as protests intensified.

Yet a history of on-again, off-again economic reform and the rise of forces, including the military, that have resisted liberalization suggest that the path to a competitive economy integrated with the world will be a difficult one, according to experts on the region.

Investors in the Gulf region are getting the jitters as the turmoil in Bahrain brings closer to home the political risk enveloping the Middle East.

Dubai’s stocks dropped to the lowest level in almost six months on Monday, with the index shedding 1.3 percent to 1516.43. The Tadawul All Share Index in Saudi Arabia slipped 0.6 percent and Qatar’s QE Index fell 0.8 percent, bringing its total loss since mid-January to 8 percent.

The first major protests to hit an OPEC country put the oil industry on edge Monday, sending crude prices jumping and raising speculation about the use of emergency oil reserves that have only been touched twice in two decades.

In addition to Libya, the industry is closely watching protests in Algeria, Bahrain and Iran, the second-largest crude exporter in the OPEC behind Saudi Arabia.

"The concerns in the market go beyond Libya," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore. "It's unlikely we're going to see any meaningful disruption of oil from the Middle East or North Africa, but the spread of this unrest has raised anxieties."

Six years after graduating as an Arabic teacher in Riyadh, the Saudi Arabian capital, Naif al-Tamimi is still waiting for the government job he was promised as a freshman.

Splitting his day between teaching part-time at a private school and driving a taxi, he could not support his family. So he sent his wife and newborn son back to live with her family, 500km from Riyadh, and moved into a shared flat.

“When I see how rich the country is and how poor I am, I feel frustrated that I cannot live with my family,” Mr Tamimi told the Financial Times. “The government said they wanted Arabic teachers. Now they only hire maths and science teachers. It is not my problem they have changed policies.”

Some of Libya’s overseas investments were politically charged months before the current crisis.

The Libyan Investment Authority, which analysts value at $60bn-$80bn, has accumulated stakes in a diverse range of foreign assets, from newspapers and football teams to banks and textiles.

Tripoli set up the LIA in 2006, after UN sanctions were lifted in 2004, to diversify the north African country’s dependence on its oil wealth. The fact it was set up so recently has sheltered it from some of the losses suffered by other Middle Eastern funds.

The forces of youth disaffection and technological openness are seeing protests against repressive authority spreading from Tunisia to Egypt to Bahrain and Libya. Iran, Yemen and Saudi Arabia may be next. But even if the regimes fall, these seemingly unstoppable forces will quickly run up against an immovable object that has long conferred power upon regional authoritarian regimes: economic rents. And unless this is addressed, the chances of a true democratic “Arab spring” are slim.

Most Middle Eastern countries are non-democratic, despite relatively high standards of living. Libya, Iran, and especially Saudi Arabia are fairly rich countries, although all come close to the bottom of the World Bank’s league table of democratic voice and accountability. Bahrain does little better. And this discrepancy between political and economic development is especially apparent in the Middle East because of the curse of rents.

Rents are easy money: unearned wealth that flows to governments with little effort. In the Middle East much of this is about oil. In Bahrain, Libya and Saudi Arabia, for example, oil revenues account for a large share of exports and state revenues. Egypt is not a large oil and gas exporter, but it produces reasonable quantities of both. This, in turn, provides the means to stifle dissent and perpetuate the regime.